Problems With Lending Money To Friends

You’ve heard it before. Lending money to a relative is akin to giving it to them. But I’m here to tell you that personal loans between friends/relatives can work – if you do it right. In order to figure out how to make them work, we need to first realize why these types of loans typically go wrong. Is it because your friend is forgetful? Is it because your cousin is too cheap? No. It’s because they convinced themselves it was actually a gift and not a loan. So how can you make personal loans between friends work? Just follow the steps outlined in this post so that you can both help your friend out and get all of your money back.

Get It In Writing

The key to making personal loans work is to get your loan terms in writing. Verbal contracts mean absolutely nothing. By having your agreement on paper, your friend will feel an obligation to pay it back. There is no mistaking that this is a loan and not a gift. It’s right there in black and white. Your agreement doesn’t need to be written up by a lawyer. It doesn’t even need to be typed. The purpose of this note is to make this financial transaction an official loan in their eyes. If you feel uncomfortable having your relative sign this agreement then don’t loan them money in the first place. If they don’t want to sign it, then apologize to them for offering them a loan.

Charge Them Interest

If you offer your relative an interest-free loan, they will not feel obligated to pay it back. An interest-free loan is such a gift to them that it makes the loan appear like a gift. All loans charge interest. So if you want to get your money back, charge them interest too. Give them an amazing deal though since they’re family. If a bank will loan them money at 15%, give them a 5% deal.

Monthly Payments

Make an agreement with your friend/relative to pay back the loan in payments every single month. Don’t just say “pay whatever you can, whenever you can”. If you do that, you might as well kiss your money (and your friendship) goodbye. You need to make it clear (in writing) how much money they are paying you back, for how long they are paying you back for, the exact date of the payment due each month and late fees.

Late Fees

Speaking of late fees, if your loan doesn’t have a penalty for being late, expect your friend to pay you late every month. Each month they will get progressively more tardy until they eventually stop paying you back altogether. Make sure you specify their due date and what penalty will be incurred if they are late.

Collateral

Personal loans carry a very large interest rate because there is typically no collateral. When you get a car loan or a home loan, interest rates are low because if you don’t pay the bank takes your car or house away. So if you want to make your personal loan to a relative a success, get some collateral. A piece of jewelry usually works great. Once the loan has been paid in full, give the item back. If the loan isn’t paid back in full, you can pawn their item and keep their past payments. They shouldn’t get mad at you either. After all, it was them who asked for money then didn’t pay you back.

Have you ever loaned money to friends or relatives? How did it work out?

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Comments

Caesar F on 12/11/12

I’ve only lend money to friends that I know will pay me back. If it’s a very little amount they owe then it’s not a big deal to me. So really it all depends on which friend it is that you’re loaning the money to. However that was a good point about collateral.

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